With the Xbox 360 having been on the market for over a year
now, the rumors of an impending price cut have been constantly batted around.
Microsoft even
stated back in 2005 before the console first launched to expect yearly
price cuts on the Xbox 360.

In a recent interview with A+E
Interactive, Microsoft’s Robbie Bach is asked about the inevitable
release of the next generation “Xbox 720.” Bach’s response was that the
engineers are always working on the future products, but that cost reducing the
Xbox 360 “seems to be the first order of business.” Lower overall component
costs will likely come into play as the hardware used in the Xbox 360 ages along
with a planned die shrink from 90nm currently used on the Xenon processor to a
65nm SOI process in 2007.

But while Microsoft is looking to reduce costs to improve
the profitability of its Entertainment and Devices Division, it’s still unclear as to when
customers will actually see any dramatic price cuts directly from Microsoft.
Some vendors are taking matters into their own hands by offering special promotions or rebates
with Xbox 360 systems, but Microsoft will likely let the PS3 dance around in
the ring for a few rounds before it starts unloading with price cuts.

Comments

Threshold

Username

Password

remember me

This article is over a month old, voting and posting comments is disabled

Ah yes, the dodgy analysis that somehow concluded that Microsoft's costs for the 360 had dropped by $200 in a year, despite the fact that they have yet to benefit from any process shrink. Sure yields will be higher, and memory will be cheaper, but it is highly unlikely that it will accumulate to a $200 saving in the bill of materials.

It's called supply-and-demand, duh. Shortly prior to launch, Microsoft wasn't in a position to negotiate with suppliers. Other manufacturers were building up their inventory for Christmas, so suppliers weren't exactly. Now that launch is over and Microsoft has an inventory built up, it can shop around more.

The components in the Xbox 360 are largely commoditized. DVD drive? You can buy it from anyone. Ditto for laptop hard-drive, RAM, and power brick. Microsoft owns the designs to the CPU and GPU, so they can fab them at any number of foundries. There is no getting one's component "designed in."

Microsoft has learned their lesson after being squeezed by Intel and Nvidia in the original Xbox.

Speaking as a circuit designer and system architect of over thirty years experience, I stand by my previous comments. However I'll add the phrase "spec'd in" to my "designed in" in order to be more explicit.

Suppliers would do anything they can to get their foot in the door up front because of future expected volume. Microsoft won't use the cheapest DVD drive du jour with twenty brands of DVD drives among the Xbox'es. They'd likely have very very few, but probably at least two. They'd be heavily tested and qualified with pricing, quality (including return/repair language defined) and volume availability arraigned up front, chosen between all the possible suppliers. It's not the same as buying one unit. They need volume, they need it delivered on schedule, they need them all to work to spec and do so for some time longer than Microsoft's guarantee(if not longer :-). Any power brick would have been custom designed and
heavily tested as well as priced to trim off any cents they can within other constraints.

Also note that they don't buy (and get priced) from order to order,
even among much lower volume electronic manufacturing, pricing is often set on a volume-per-year basis, not on a per-order basis, and so Microsoft's first year of production would be huge. But because of that hugeness, they can do better than that normal operating practice sort of purchasing methods (like getting binding quotes ahead of even picking technologies to use -- heck even I do that in my much lower volume designs)

Samsung and Hitachi are supplying drives for the 360 IIRC. These are just standard SATA with some modification. Nothing would stop Microsoft from switching to another supplier, as they have done in the past with the original Xbox. The company has plenty of experience working with heterogeneous hardware. To throw that out the window to lock themselves to specific suppliers would be stupid. Any supplier counting on that would be too.

You speak as through manufacturers have unlimited spare capacity that they desperate to utilize. Volume purchase only gives the buyer bargaining power if there's ample supply. If there isn't, then it actually drives up prices. It's basic economics.

Microsoft's procurement process definitely does not work as you described. It's documented in their own case studies. No one can run a supply-chain in such a fashion and hope to stay in business in a competitive environment. Setting a price on a yearly basis is stupid on a product whose price depreciate over time. You either overpay or risk supply-chain interruption because a supplier isn't willing to sell at a loss--as had happened with Nvidia. Microsoft uses an online procurement system with the 360, where multiple suppliers have to bid for an order. That helps the company get the best possible deal that a supplier is willing to accept and capable of fulfilling.